Is Bitcoin the next big technology?

Have you purchased any Bitcoins yet? If not, you should really think about it.

Bitcoin has the potential to revolutionise the global banking world just like Uber did with the taxi industry. In the 1970’s people heard of a new technology called the “computer.” It was complicated and left most investors disinterested. Likewise, in the early 1990’s, a new technology called “the Internet” appeared on the scene. Many conventional investors held back.

Bitcoin as a currency and banking platform is potentially in the same phase as those early world-changing technologies, although it is fast becoming more mainstream. The October cover story of the Economist featured Bitcoin and most news agencies have covered it in detail. Numerous online retailers are now accepting Bitcoins including Ebay, Microsoft, Dell, Expedia, WordPress and others.

Even US Federal Reserve Chairwoman Janet Yellen has been talking about it: she is quoted as saying …”this is a payment innovation that is taking place entirely outside the banking industry” … “It’s not so easy to regulate Bitcoin because there’s no central issuer or network operator. This is a decentralized, global [entity]”

And therein lies the beauty of Bitcoin. It acts like an online bank account with a unique type of money in it, but it operates completely outside of the global banking and currency system, with no government being able to control it.

What is Bitcoin?
Bitcoin is a computer program. It allows people to trade divisible digits – called Bitcoins – which can be sent to other people seamlessly. It fulfils most functions of a modern day currency and banking system.

However, there are three major benefits to Bitcoin that catapult it into the global payments scene. The first is that Bitcoins cannot be increased in number, beyond what they have been programed to do. Secondly, Bitcoin transactions are decentralised on computers around the world, making it virtually impossible for any particular government (or grouping of governments) to shut it down. The third is that if you receive a Bitcoin as payment, you actually have a claim to that Bitcoin – unlike currency in the conventional banking system. Let’s look at each of these in turn:

Fixed Amount of Money
Firstly, the number of bitcoins are fixed based on the most advanced encryption available. In particular, the system uses a technology known as Public Key Infrastructure – or specifically, the “Block Chain”. While the detail here can get complex, the concept is fairly simple. The Bitcoin program is publically available for everyone to inspect and there is a public record of all bitcoins available. Each owner has a unique and anonymous password to access their bitcoins. It is similar in a way to a Post Office Box system. We all can see how many Post Office Boxes there are. But each owner would have a key to access their unique box.

In other words, there is no way that anyone would be able to increase the number of bitcoins in circulation. The number is fixed and is publically known.

Decentralised Banking
Secondly, the Bitcoin system is virtually impossible to shut down. There have historically been many e-currencies before. However, shortly after they gained traction, the authorities in the country concerned quickly arrested the individuals and went to the underlying server to shut it down. E-gold was a typical example. This is simply transaction control by governments, who have a vested interest in keeping people using their national currencies.

But with Bitcoin it isn’t that simple. Bitcoin uses what is known as “peer-to-peer” technology to facilitate payments. You cannot simply shut it down, since there is no server that operates the Bitcoin program – rather, hundreds of thousands of computers around the world are available to facilitate payments. The combined internet is the Bitcoin server. Even if the authorities did stop all Bitcoin transactions from computers in, say, the United States, computers in other countries would be available to facilitate payments.

The Bitcoin “banking payments system” is one of the hardest for governments to stop or control. They can provide some level of regulation within each country. But they practically would not be able to stop the Bitcoin system from operating.

Bitcoins vs Bank credit

The third arrow in Bitcoin’s quiver is that each bitcoin on the Bitcoin system is a direct claim to a bitcoin. This seems a rather odd benefit to emphasise. However, contrast this with the current global banking system, and it becomes much more apparent why.
Few people realise that their deposits at banks aren’t actually a claim to cash vaulted in a bank. Banks typically hold less than 3% of their customer’s deposits on hand in cash. There really is very little actual cash in the banks that are supposed to be looking after your cash.

When you receive an online payment, all you have is a loan claim to a bank which has very little money. Most central banks will look to supply newly printed money to the banks to bail them out if necessary – however, in the case of a panic and run on the bank, your so-called deposits are vulnerable.

If you hold bitcoins by comparison, you actually have a unique ownership claim to those bitcoins. There is no bank credit or market exposure. Even if banks went bankrupt on a large scale, it wouldn’t stop your ability to hold, transfer and receive bitcoins as payment.

The Greece Example
The above three benefits of Bitcoin were illustrated well in the recent Greek crisis. For a period, the banking system stopped all withdrawals or international payments from occurring. Greeks had very limited and restricted access to their Euro bank deposits.

During this time, the Euro was being printed en masse – eroding the value of the currency. Greek deposits were at the mercy of those who controlled the banks and the money printing process. However, those Greeks that owned bitcoins didn’t have a problem. They could make international payments with ease, and they could rest secure in the fact that they owned bitcoins that weren’t going to disappear or inflate away.
In a world where most major currencies are being printed on a grand scale, bitcoins are fixed in number providing currency stability. With increasing transaction control from governments, Bitcoin provides transaction freedom. And in a hollow banking world, Bitcoin provides security from financial collapse.

As with all disruptive technologies, there is risk. While Bitcoin has lasted five years of interrogation by governments and hackers alike, the technology is complex and may yet still be exposed in some way – in which case its price may fall to zero. However, that seems very unlikely at this stage and certainly no more likely than the value of “money in the bank” falling to zero. Bitcoin is an innovative technology that may just undermine the global payments system and provide a solution to the financial and economic malaise the world finds itself in.

We are investigating a way to make Bitcoins accessible on the ground in point of sale payments systems in Zimbabwe. What Bitcoin opportunities are you going after?